Nelson Chu breaks down venture debt as loans for early-stage companies without profits, unlike traditional corporate debt. Venture debt targets firms backed by strong investors and growth potential, charging much higher interest rates because lenders bet on future funding rounds rather than current cash flow.
Venture debt is just honestly a subset of corporate debt, right? It's like very simple. So you're literally just essentially providing capital to a single borrower. It could be— it's probably a company. There are EBITDA profitable companies, in which case you're literally just loaning them money to be able to actually, based on their existing cash flows, expect that they can support the loan that you're giving them. Right. The interest is not too crazy and it's just more for them to be able to grow. For venture debt, it is the smallest side of corporate debt, right? So it is going to be earlier stage companies. Probably not EBITDA profitable or positive, but you're kind of betting on the fact that they have great investors, they have a business that will be able to scale, they'll be able to raise more money. And that's kind of the bet you're willing to make. The APY that you'd be doing for venture debt is likely significantly higher than somebody who's EBITDA positive. It just kind of naturally makes sense. Now, venture debt prior to kind of all this going on and prior to the Fed raising rates, prior to the current environment that we're in for just venture equity in general, used to be much more opportunistic.
